25.08.2016.

ICT is almost a perfectly performing sector

For Latvijas Banka Monthly Newsletter, In Focus, August, 2016

  • Igors Kasjanovs

    Igors Kasjanovs

    economist, Latvijas Banka
Photo by: Shutterstock
Over the last few years, the information and communications technologies sector (ICT) has been among those with fastest growth. It is no secret that in recent years rapid expansion of different ICT services could be observed in Latvia: programming, data storage, development of mobile applications, development of various complex ICT solutions, etc. However, unlike retail trade or manufacturing, the sector usually is not in the spotlight of economic analysts and policy makers.

This can be explained by the size of the sector – ICT only accounts for about 5% of the total value added, even though this level is close to the European Union's average. Nevertheless, the success of the sector should be noted: it is one of the fastest growing, with high productivity levels, high average salary, implementation of latest technologies, and other positive features.

The ICT sector consists of six subsectors: publishing activities, video and television programme production, programming and broadcasting activities, telecommunications, computer programming and the related activities as well as information service activities. Historically, the largest part of the ICT sector turnover in Latvia has been generated in the telecommunications sector (about 60%), where important players of the telecommunications market are operating. But over the last few years, computer programming and information service activities have been rapidly gaining their relative share.

 

ICT sector's value added share in Latvia and EU (%) and real annual growth (year-on-year, %)

Over the last few years, the information and communications technologies sector (ICT) has been among those with fastest growth. It is no secret that in recent years rapid expansion of different ICT services could be observed in Latvia: programming, data storage, development of mobile applications, development of various complex ICT solutions, etc. However, unlike retail trade or manufacturing, the sector usually is not in the spotlight of economic analysts and policy makers. This can be explained by the size of the sector – ICT only accounts for about 5% of the total value added, even though this level is close to the European Union's average. Nevertheless, the success of the sector should be noted: it is one of the fastest growing, with high productivity levels, high average salary, implementation of latest technologies, and other positive features.  The ICT sector consists of six subsectors: publishing activities, video and television programme production, programming and broadcasting activities, telecommunications, computer programming and the related activities as well as information service activities. Historically, the largest part of the ICT sector turnover in Latvia has been generated in the telecommunications sector (about 60%), where important players of the telecommunications market are operating. But over the last few years, computer programming and information service activities have been rapidly gaining their relative share.  ICT sector's value added share in Latvia and EU (%) and real annual growth (year-on-year, %)  Data source: Central Statistical Bureau.  The ICT sector employs 2.9% (2015) of the total number of working population. Taking into account that the sector accounts for about 5% of total value added, it is easily seen that the sector's productivity hovers above the average level. In fact, it has the most elevated productivity level among all sectors. But, certainly, labour productivity of such a level can also be explained by a comprehensive degree of automation and capital intensity. For instance, the telecommunications sector is very capital intensive (technologies are cost intensive), thus providing ample value added per person employed. However, the huge capital and technology intensity is the factor why the salaries paid by the sector are among the largest across all sectors. Higher average salaries are paid only in the financial sector. The large salaries of the ICT sector are determined by several factors. Comprehensive technological intensity has already been mentioned. It means that there are fewer workers employed but their skills have to be very advanced. For instance, computer programming requires very specific training. The main reason, however, is the fact that Latvia's ICT sector is operating in an environment of open market competition. The ICT sector has almost no transnational barriers in comparison to other sectors. Latvian ICT companies are competing and collaborating with companies from all over the world. That is why the ICT sector plays an important role in external trade. For instance, in 2015 the ICT sector accounted for almost 10% of the current account surplus. What future challenges does the ICT sector face in Latvia? During the last decade, the availability of PCs and the internet in households and companies has increased substantially. That has been a significant factor driving the growth of the ICT sector. Further challenges will be related to an increase in computer/internet literacy of the population. The range of activities using ICT is still very narrow in Latvia. Many do use the internet for entertainment purposes, but only a few take the advantage of the full spectrum of offered opportunities, like communication with the public sector, e-learning, e-purchases, etc. Moreover, the ICT sector is transforming: the importance of mobility is increasing, therefore, the development of mobile applications and solutions is currently the main driver of changes in the ICT sector.

Data source: Central Statistical Bureau.

 

The ICT sector employs 2.9% (2015) of the total number of working population. Taking into account that the sector accounts for about 5% of total value added, it is easily seen that the sector's productivity hovers above the average level. In fact, it has the most elevated productivity level among all sectors. But, certainly, labour productivity of such a level can also be explained by a comprehensive degree of automation and capital intensity. For instance, the telecommunications sector is very capital intensive (technologies are cost intensive), thus providing ample value added per person employed. However, the huge capital and technology intensity is the factor why the salaries paid by the sector are among the largest across all sectors. Higher average salaries are paid only in the financial sector. The large salaries of the ICT sector are determined by several factors. Comprehensive technological intensity has already been mentioned. It means that there are fewer workers employed but their skills have to be very advanced. For instance, computer programming requires very specific training. The main reason, however, is the fact that Latvia's ICT sector is operating in an environment of open market competition. The ICT sector has almost no transnational barriers in comparison to other sectors. Latvian ICT companies are competing and collaborating with companies from all over the world. That is why the ICT sector plays an important role in external trade. For instance, in 2015 the ICT sector accounted for almost 10% of the current account surplus.

What future challenges does the ICT sector face in Latvia? During the last decade, the availability of PCs and the internet in households and companies has increased substantially. That has been a significant factor driving the growth of the ICT sector. Further challenges will be related to an increase in computer/internet literacy of the population. The range of activities using ICT is still very narrow in Latvia. Many do use the internet for entertainment purposes, but only a few take the advantage of the full spectrum of offered opportunities, like communication with the public sector, e-learning, e-purchases, etc. Moreover, the ICT sector is transforming: the importance of mobility is increasing, therefore, the development of mobile applications and solutions is currently the main driver of changes in the ICT sector. 

APA: Kasjanovs, I. (2019, 14. sep.). ICT is almost a perfectly performing sector. Taken from https://www.macroeconomics.lv/node/1793
MLA: Kasjanovs, Igors. "ICT is almost a perfectly performing sector" www.macroeconomics.lv. Tīmeklis. 14.09.2019. <https://www.macroeconomics.lv/node/1793>.

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